advocate’s guide to the community reinvestment...
TRANSCRIPT
Preeti Vissa Program Manager, Community Reinvestment Adam Briones Program Coordinator, Community Reinvestment
advocate’s guide to the community reinvestment act The What, Why, and How of CRA August 2009
T he Community Reinvestment Act (CRA) was
passed in 1977 in response to redlining, the
illegal practice of not investing in low-income
and minority communities. Specifically, the law calls for
the federal government to encourage banks to meet the
credit needs of the local communities in which they
operate.
CRA has been successful in increasing access to financial
services for low-and-moderate income communities
across the country. As a result, CRA has created jobs,
expanded homeownership opportunities, helped small
businesses grow and has increased access to affordable
housing for many communities.
In 2000, major banks in California made more than $30
billion in lending and investments through their CRA
commitments. (Major banks include: Bank of America,
California Federal Bank, U.S. Bank, Union Bank of CA,
Washington Mutual Bank, and Wells Fargo.)
CRA has led to successful partnerships between
community groups and banks that have led to a
fundamental change in the way banks treat low-income
communities—from burdens to profitable markets. CRA
commitments have been applied towards community
development projects United States like affordable
housing, community health centers, and small business
lending1.
What CRA Is Not
Despite the achievements of CRA, it is limited in the
scope of what it can require banks to do.
CRA does not force banks to operate outside of their
original mission .
CRA does not require banks to make risky loans that
What is redlining? Redlining is the illegal business practice of avoiding
certain communities on the basis of race, income, and
location. In the specific context of CRA, banks were
accused of redlining because they took deposits out of
poor communities of color, but only made loans to
wealthier areas.
will hurt their profits.
CRA does not create quotas.
CRA does not limit the geographic area in which a
bank can make loans and it does not require banks to
make a specific proportion of loans in any particular
geographic area.
CRA does not require any bank to make every type
of loan or meet all community needs alone. Banks
may specialize by product type.
CRA: A Scapegoat for the Financial Crisis
Recently, CRA has been blamed with causing the
financial crisis. As CNBC host Larry Kudlow falsely
argued, “The Community Reinvestment Act…literally
pushed these lenders to make low-income loans.” Neil
Cavuto, a Fox News anchor, took the false argument one
step further, saying, “*l+oaning to minorities and risky
folks is a disaster.” Critics have claimed that the CRA
forced banks to extend risky loans to unqualified
borrowers.
However, the data clearly shows that the subprime crisis
is not a result of too much regulation but rather the
result of nonexistent regulation. Specifically:
Only 25% of the subprime mortgages that are now
causing the collapse of the credit markets were
originated by CRA-regulated institutions. The
remaining 75% of subprime mortgages were
originated by independent mortgage brokers or by
lightly regulated subsidiaries of regulated banks2.
Banks subject to CRA are about two-thirds less likely
to offer borrowers high cost mortgage loans. Half of
the subprime loans were not made by federally
insured banks (FDIC) or CRA approved banks, but
instead by independent lenders3.
34.3% of mortgage loans issues by non-CRA lenders
were high cost/ risk loans in 2005. By contrast, those
institutions that were closely examined by CRA only
issued 5.1% of high cost/risk loans4.
Strengthening CRA
CRA hasn’t been perfect, but it has been immensely
successful, especially where community groups have
organized to develop public-private partnerships with
ADVOCATE’S GUIDE TO CRA | PAGE 2
What is CRA?
ADVOCATE’S GUIDE TO CRA | PAGE 3
banks. CRA has helped banks find profitable markets
that they had otherwise been avoiding.
However, more needs to be done. Approximately 28
million people in the U.S. are still unbanked. People of
color are disproportionately represented, with almost
25% of African Americans and Latinos lack basic bank
accounts5. In 2007, home lending to lower-income
African Americans decreased by 72% and lending to
Latinos in all income groups fell by almost 40%. CRA is a
good starting point, but the banking system can do much
more to meet the credit needs of low income
communities and communities of color.
Now is the time to strengthen CRA. As our nation
grows more diverse and our banking system more
complex, it is important that CRA evolve to meet these
new challenges. CRA needs to be strengthened so that it
can be most relevant and effective at meeting the needs
of our country's low-income families and its 110 million
people of color. In order for this to happen, we suggest
the following improvements to CRA:
Make CRA applicable to all financial institutions
CRA should be extended to reach all sectors of the
financial industry. Without being held to the “safety and
soundness” standard of CRA, these institutions were
able to easily offer dangerous products without any
consumer safeguards. It is crucial that the same
safeguards that apply to the banks be expanded to other
financial institutions.
In order to prevent future crises, the Greenlining
Institute advocates for the expansion of CRA-like
policies to every type of financial institution. Such
institutions include investment banks, hedge funds,
large credit unions, insurance companies, and any other
institutions that provide financial services.
Make CRA more relevant to diverse communities
The demographics of the US are changing rapidly; by
the year 2042, 54% of all people in the country will be
people of color. People of color have the highest rates of
being unbanked and are suffering disproportionately
from the foreclosure crisis. There is no doubt that our
economy will suffer if such a large portion of residents
are without adequate financial services. Recent research
from the Federal Reserve Bank of San Francisco shows
that Black homeowners were more than twice as likely as
White borrowers to receive a high-cost, subprime loan,
even after controlling for income and FICO scores.
In this context, Greenlining believes CRA should
consider race and ethnicity during exams. Though race
and ethnicity data is collected for home loans, it is not
collected for business lending and currently, banks can
get an “Outstanding” rating even when little to no home
and business loans go to communities of color, or when
no direct outreach is made to diverse communities.
As the fastest growing segment of the population,
diverse communities will play an increasingly important
role in our nation’s renewed economic development and
growth. By ending colorblind reporting, CRA can help to
ensure these communities are provided with the fair
access to capital and other financial tools needed to
contribute to the country’s future.
Increase public input in the examination process
Regulators should hold annual hearings that allow
financial institutions to report how they are reaching all
segments of the American economy. The regulators
should also hold annual diversity hearings that allow the
public to provide input on individual banks’ CRA
performance.
The Home Mortgage Disclosure Act (HMDA) How is race/ethnicity data collected for home loans?
The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1975 to bring transparency to the private
mortgage origination industry. It requires lenders to disclose the income, race, and gender of borrowers, as well as
the number and dollar amount of the loans made.
HMDA is a key component of CRA and is a model for how transparency in lending can benefit consumers and
lenders by promoting increased lending in underserved areas and highlighting untapped markets for lenders to serve
with fairly priced products. As our banking system evolves, the model established by HMDA should be replicated for
other types of lending such as business loans to ensure transparency and accountability.
ADVOCATE’S GUIDE TO CRA | PAGE 4
Make CRA ratings count
The CRA rating system is outdated and in need of
substantial changes to make it relevant. Over half of the
largest financial institutions receive an outstanding rating
and generally none get less than satisfactory. (In fact, in a
recent review of the ratings for all 36 financial institutions
evaluated in a one-year period with over $5 billion in
assets, 21 received an “outstanding” rating, “14 received
a “satisfactory rating” and only 1 received a “needs to
improve” rating.) The CRA rating system should be
reformed so that a bank’s overall performance in serving
the economic and credit needs of communities are
thoroughly examined.
Focus on the intent and spirit of the law
CRA has the potential of becoming a simple bureaucratic
tool that counts points and does not necessarily reflect
real efforts being made at extending financial services to
the unbanked. CRA should be modernized to maintain
the integrity of the act and to ensure that innovative and
creative efforts at empowering consumers are
recognized.
For example, banks are making more attempts to serve
their local economies by making efforts to diversify their
workforce and provide business contracts to local
minority-owned vendors. They should receive CRA
credit for this. Others are considering innovative wealth
building tools and products for reaching the unbanked.
These efforts should also be properly recognized in CRA
exams.
CRA should direct investments to those areas that are most underserved and where financial institutions profit.
Currently a bank’s assessment area includes the
geographies in which the bank has its main office, its
branches, and its deposit-taking ATM’s. This system is
increasingly outdated especially for financial institutions
that do not rely on branches or ATMs.
A recent example with Goldman Sachs highlights the
need to reform how assessment areas are defined. In
order to save itself and take federal support Goldman
Sachs registered as a bank on September 21, 2008.
However, since Goldman only has a physical presence in
New York City, it has been effectively allowed to redline
California by not having any CRA commitment to a state
from which they receive a large amount of their revenue.
References
1National Community Reinvestment Council. (NCRC) “CRA Toolkit.” Available at http://www.ncrc.org/images/stories/era/cra%
20toolkit_v8_remarks_joint_statement.pdf
2Prepared Testimony of Michael S. Barr Professor of Law, University of Michigan Law School Before the Committee on Financial
Services U.S. House of Representatives Hearing On The Community Reinvestment Act: Thirty Years of Accomplishments, But
Challenges Remain.ʹʺ February 13, 2008.
3Traiger & Hinckley LLP, The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis. January 7, 2008.
4Robert B. Avery, Kenneth P. Brevoort & Glenn B. Canner. “Higher Priced Home Lending and the 2005 HMDA Data.” 2006 Federal
Reserve Bulletin A123.
5Office of the Governor: Bank on California, Helping Californians Achieve Financial Mobility. Available at http://gov.ca.gov/fact-
sheet/8599/
6National Public Radio. “Politics Undercut Mortgages For Illegal Workers.” November 4, 2008
Center for Responsible Lending. “Issue Brief: CRA is not to Blame for the Mortgage Meltdown.” October 3, 2008. Available at
http://www.responsiblelending.org/mortgage-lending/policy-legislation/congress/cra-not-to-blame-for-crisis.pdf
ADVOCATE’S GUIDE TO CRA | PAGE 5
This year there has been a 30.3% decline in total number of SBA-backed loans nationally, including 39.3% decline in California, compared to last year.
Myths vs. Facts: Scapegoating CRA on the Financial Crisis Myth: CRA caused Bear Stearns, Lehman Brothers, and Merrill Lynch to fail.
Fact: CRA did not apply to these failed institutions. Had these companies been more closely regulated, they might still
be around today.
Myth: The Community Reinvestment Act (CRA) caused the foreclosure crisis.
Fact: The majority of loans resulting in foreclosure were originated by non-CRA covered financial institutions. In fact,
only about 25 percent of subprime loans were made by institutions covered by CRA.
Myth: Lending to low-income communities and communities of color caused this crisis.
Fact: It was greed and de-regulation on Wall Street that led to the crisis. Up to four-fifths of subprime loans were issued
by financial institutions that operated with little or no federal regulatory oversight .
Myth: Excessive lending to undocumented immigrants led to the financial crisis.
Fact: Mortgages originated to undocumented immigrants (ITIN mortgages) have actually performed better than conven-
tional loans. ITIN mortgages have a delinquency rate of 0.5% versus a 6.4% delinquency rate for all home loans6.
Myth: CRA was a liberal-driven program designed to con banks into extending credit to unqualified minorities.
Fact: CRA has helped find banks new markets of credit worthy costumers that have led to profitable investments.
Myth: CRA has forced banks to lend to families that are under-qualified—and fines banks that don’t comply.
Fact: CRA does not force lenders to make riskier loans. It requires regulated banks to provide loans to all qualified appli-
cants regardless of geographical location and/or race. No bank has ever been fined for failure to comply with CRA.
Myth: The financial crisis was a result of too much regulation.
Fact: The most volatile sections of the mortgage business, including securitization, were almost completely unregulated.
It is securitized mortgages that are now the hardest loans to modify, further adding to the financial crisis. (Securitization
is conversion of pools of loans (such as mortgage loans) that are bought from lenders, into securities or bonds that are
then sold to various investors.)
Myth: Bankers hate CRA.
Fact: Every large bank has now publicly stated that CRA did not cause the foreclosure crisis. As Richard Davis at US
Bank has observed, “Community reinvestment is integral to our business because it helps ensure the success of every
neighborhood we serve.”
THE GREENLINING INSTITUTE 1918 UNIVERSITY AVENUE, 2ND FLOOR
BERKELEY, CALIFORNIA 94704 T: 510-926-4001 F: 510-926-4010
WWW.GREENLINING.ORG
Contact Preeti Vissa
Community Reinvestment T: 510-926-4006
www.greenlining.org
THE GREENLINING INSTITUTE
Greenlining is a multi-ethnic advocacy, research, leadership development, and public policy organization whose ultimate goal is to increase the role that low-income and minority Californians play in the civic
arena in order to create equitable policies and improve quality of life for all communities.
Our mission is to empower communities of color and other disadvantaged groups through multi -ethnic economic and leadership development, civil rights and anti -redlining activities.